Apr. 11, 2017
Herbicide sales were up 15% to $871 million. Glyphosate sales are well up on last year, due to a higher average technical price, and improved volumes in Australia/New Zealand and North America. Margin percentage is slightly down, due to competitive market conditions in Australia and North America. Phenoxy herbicide revenues are in line with last year, but margins were up, driven by an improved cost position.
Other herbicides are well ahead of last year, with Flumioxazin and Picloram being the main drivers.
Group insecticide sales were up 25% to $191 million, and margin percentage is up approximately 1%. The increased sales were driven mainly by Brazil, with growth from new products, extensions into new crops and strong sales of a Sumitomo-sourced product that controls the white fly insect.
Fungicide sales were up by 5% to $123 million, with margins ahead of the prior year. The fungicide portfolio performed well in the period, with most regions contributing to the growth. Main contributors to the result include Mancozeb, Fludioxinil and the copper-based products.
The 'other products' category sales were up 2% to $123 million. The growth was mainly driven by the Croplands equipment business, based in Australia. Aided by a record grain harvest in Australia and increased demand from growers, Croplands was able to increase sales by 20% compared to the first half last year.
The company’s seed technologies segment includes sales of seeds, managed under our Nuseed business, and seed treatment chemistry. Revenues in this segment were $50.6 million, 21% ahead of the prior period sales of $41.7 million. The segment generated a loss of $0.2 million at the underlying EBIT level, compared to a $4.4 million loss in the prior first half.
A combination of higher sales volumes and improved gross margin percentage delivered a much improved result in the first half. All regions performed well, with Australia making a good contribution due to higher collections of canola end-point royalties from the strong 2016 farmer saved seed harvest. Europe saw growth in its sunflower business, and the Brazilian business achieved significant growth in sorghum and canola products.
The company's omega-3 canola program achieved numerous milestones in the half, with the key achievement being the lodgement of the Australian registration package on 10 February (see separate company announcement released today). Regulatory filings are also expected to be lodged in the USA and Canada before the end of this month.
This unique canola will provide long-chain omega-3 oils, similar to those found in fish oil, using a sustainable land-based source. It has been developed through collaboration between Nufarm’s wholly owned subsidiary, Nuseed; the Commonwealth Scientific and Industrial Research Organisation (CSIRO); and the Grains Research and Development Corporation (GRDC).
Pending regulatory approvals, commercialisation of the omega-3 oils is expected to commence in 2018 or 2019.
Australia / New Zealand
Australia/New Zealand sales increased substantially on the prior year, as the business executed a strategy to regain volume and share. There was a resulting impact on gross margins, particularly in Australia, where the business competed more aggressively to meet this objective.
The segment generated sales of $306.3 million, up 32% on the previous year ($231.6 million). Underlying EBIT was $13.3 million compared to $14.6 million in the prior period.
Climatic conditions in Australia contributed to a strong finish to the 2016 winter cropping season, resulting in excellent grain harvests for most growers. The summer season started well in the key cropping zones of northern NSW and southern Queensland, but then turned hot and dry in December and January. The west received good rainfall over summer, providing an optimistic outlook for the coming winter season.
The previously announced closure of three manufacturing facilities in Australia and New Zealand is now complete. Two sites have been sold, whilst the remaining site is on the market. The full benefit of these changes will be realised by the end of the current financial year, with lower fixed costs; better plant utilisation; and improved efficiencies. The recovery in sales volumes will help secure the full benefits of the restructuring program.
Asian crop protection sales were $94.3 million compared to $71.6 million in the first half of the prior year, an increase of nearly 32%. Underlying EBIT improved to an even greater extent to $14.5 million, up 54% on the $9.4 million generated in the prior year.
Indonesian sales were well up on last year, driven by good weather and an early start to the planting season. Last year, Indonesian sales were severely impacted by the El Nino weather event. The early planting season moved sales into the first half of this financial year as compared to the second half of last financial year. There were also continued good sales into Japan, China and Korea. The higher sales, combined with an increased focus on higher margin products, led to the improved EBIT result over the prior period.
North American crop protection sales grew by 16% to $291.1 million. Underlying EBIT was up strongly to $17.7 million, compared to $7.4 million in the prior first half period.
A number of new products were successfully launched during the period, helping to drive stronger margins and strengthening Nufarm’s position with its channel partners. The implementation of Salesforce.com - a customer relationship tool - was completed in February, and is resulting in better business processes, and better communication both within the organisation and with distribution customers.
The Calgary plant in Canada was closed last June, with production moving to the Chicago Heights facility. The full benefit of these manufacturing efficiencies are being realised in the 2017 financial year.
Despite the tough market conditions in Latin America, Nufarm increased market share while maintaining a strong focus on risk management.
Latin American crop protection sales were up 13% on the first half of the previous year ($467 million v $415 million). Underlying EBIT at $55.8 million was down 3% on the prior period’s $57.7 million.
The total value of the Brazil crop protection market is estimated to have been flat in calendar year 2016 (as measured in US dollars) compared to calendar year 2015. Nufarm’s local currency sales were up by 9%, and we increased share over the 2016 calendar year. The business continues to enhance the portfolio with several new products launched in the first half. Channel inventory for Nufarm products is at normal levels.
In contrast to last year, the average Brazilian Real exchange rate for the first half period was nearly 10% stronger against the Australian dollar and nearly 14% stronger against the US dollar. The stronger Brazilian Real was also far less volatile compared to the 2016 first half. This resulted in a greater proportion of sales being invoiced in US dollars, and allowed the business to manage the foreign currency exposures better, resulting in a currency loss lower than the prior period and within the guidance provided at the 2016 full year results.
A feature of the Brazilian market during the period was the continued challenges faced by the customer base in obtaining credit. Whilst the business managed credit well, and growers are experiencing record harvests, the company remains vigilant on customer receivables.
The strong Real did however; result in farmers delaying their purchases of crop protection inputs in anticipation of price reductions, and this led to some pricing pressure in the market. New investments to support product launches and bring increased expertise to the treasury function resulted in a higher cost base in Brazil. Despite this, Brazil grew earnings in Australian dollars.
The Argentina business suffered from a delayed season, due to excessive rainfall. This caused growers to delay purchases and created pricing pressure in the market. The Argentina result was also impacted by the exchange rate, with the Argentina peso 60% weaker against the Australian dollar compared to the first half last year. These impacts resulted in Argentina earnings being 50% lower than the prior period in Australian dollars.
European sales were below the prior period by 15% (2017 1H: $150.9 million v 2016 1H: $176.7 million), but only down 3% on a constant currency basis. Underlying EBIT improved to $8.8 million, ahead of the $7.1 million posted in the first half of 2016. Seasonal conditions were mixed, but generally unfavourable across North West Europe.
Nufarm's branded sales were impacted by weaker demand driven by the unfavourable seasonal conditions, and some phasing impact, as growers delayed orders in the current low soft commodity price environment. Despite the lower sales, new product launches and a higher margin product mix contributed to the improved profitability of the business.
The restructuring of the European manufacturing base is nearly complete, with manufacturing efficiency programs continuing at the Linz (Austria) and Gaillon (France) production facilities. A more efficient European manufacturing base is strengthening Nufarm’s competitive position and lowering the working capital requirements of the business.
The second half represents the major selling period for Nufarm in Australia, North America and Europe, as well as in the company’s seed business.
While seasonal conditions have been mixed in Australia in recent months, it is expected that the business will secure increased volumes over the balance of the year and this will help deliver the full benefits of restructuring activities undertaken over the past three years. Given normal weather, the business is expected to generate a stronger second half result than in 2016.
Market conditions in North America remain very competitive, however Nufarm expects to build on its excellent first half performance and deliver a strong full year result.
Nufarm’s business in Latin America will be impacted by the negative market conditions in Argentina and the expected later timing of sales in Brazil, which had an outstanding performance in the second half of 2016. Second half cash collections will be a major focus for the company, along with close management of customer credit and foreign currency exchange risk.
Demand in Europe is expected to strengthen in the second half of the year (given average weather conditions) and Nufarm is well placed to capitalize on those opportunities. The restructuring and performance improvement program is delivering efficiencies in the European operations and this will contribute to what management expects to be a slightly improved second half result than in the previous year.
The current outlook for the Australian canola season is optimistic, with good moisture in Western Australia and canola pricing attractive compared to wheat. Good rains are needed in March and April to support increased canola plantings and drive higher profitability of the seed business in the second half. The second half period will also see more positive progress on the canola omega-3 program, as we continue to move through the regulatory process and advance precommercialisation plans.
Management expects net interest expense for the full year to be moderately lower than the $96 million incurred in the 2016 financial year. The guidance for foreign exchange impact remains at the $1 million to $1.5 million per month of hedging cost for Latin America.
A strong focus will be maintained on balance sheet objectives, in particular working capital efficiencies. Management expects the average net working capital to sales percentage to be lower than in the previous year.
In summary, the business is expected to generate an improved EBIT on the prior year, driven by the combination of growing revenues, margin expansion and cost saving benefits.